Final answer:
Providing insurance on a production facility is a facility-level activity, which relates to costs that remain constant regardless of the number of units produced and is thereby spread across all units within the facility. It contrasts with unit-level, batch-level, and product-sustaining activities. This practice can lead to lower costs per unit due to economies of scale in larger production facilities.
Step-by-step explanation:
Providing insurance on a production facility is an example of a facility-level activity. Activities at the facility level are those costs that are incurred no matter how many units, batches, or products are produced in the facility. Therefore, the insurance cost is spread across all the units produced and does not vary with the number or type of units, as opposed to a unit-level activity that varies with the number of units produced, a batch-level activity which varies with the number of batches run, or a product-sustaining activity which is associated with supporting a specific product regardless of the number of units or batches.
In the context of economies of scale, as a factory increases its output, the cost per unit goes down. This implies that a larger factory with a higher output level can spread the fixed costs, such as insurance, over a larger number of units, thus reducing the per-unit cost of production. However, this is different from the notion of an actuarially fair premium, which is based on risk assessment for groups with different risks or for a group as a whole when individual risk information is not available.